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Estimated Costs to Households From the Cap-and-Trade Provisions of H.R. 2454

June 20, 2009

Yesterday,CBO released an analysis that examines the average cost per household that would result from the greenhouse gas cap-and-trade program in the American Clean Energy and Security Act of 2009 (H.R. 2454, as it was reported by the Committee on Energy and Commerce) and how that cost would be spread among households with different levels of income. The analysis does not include the effects of other aspects of the bill, such as federal efforts to speed the development of new technologies and to increase energy efficiency by specifying standards or subsidizing energy-saving investments.

Reducing emissions to the level required by the cap would be accomplished mainly by stemming demand for carbon-based energy by increasing its price. Those higher prices would, in turn, reduce households' purchasing power. At the same time, the distribution of emission allowances would improve households' financial situation. The net financial impact of the program on households in different income brackets would depend in large part on how many allowances were sold (versus given away), how the free allowances were allocated, and how any proceeds from selling allowances were used. That net impact would reflect both the added costs that households experienced because of higher prices and the share of the allowance value that they received in the form of benefit payments, rebates, tax decreases or credits, wages, and returns on their investments.

The incidence of the gains and losses associated with the cap-and-trade program in H.R. 2454 would vary from year to year because the distribution of the allowance value would change over the life of the program. In the initial years of the program, the bulk of allowances would be distributed at no cost to various entities that would be affected by the constraint on emissions. Most of those free allocations would be phased out over time, and by 2035, roughly 70 percent of the allowances would be sold by the federal government, with a large share of revenues returned to households on a per capita basis. This analysis focuses on the effect of the legislation in the year 2020, a point at which the cap would have been in effect for eight years (giving the economy time to adjust) and at which the allocation of allowances would be representative of the situation prior to the phase-down of free allowances. The incidence of gains and losses would be considerably different once the free allocation of allowances had mostly ended. Although the analysis examines the effects of the bill as it would apply in 2020, those effects are described in the context of the current economythat is, the costs that would result if the policies set for 2020 were in effect in 2010.

On that basis, CBO estimates that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billionor about $175 per household. That figure includes the cost of restructuring the production and use of energy and of payments made to foreign entities under the program, but it does not include the economic benefits and other benefits of the reduction in greenhouse gas emissions and the associated slowing of climate change. Of the total cost, CBO could not determine the incidence of certain pieces (including both costs and benefits) that represent, on net, about 8 percent of the total.

For the remaining portion of the net cost, households in the lowest income quintile would see an average net benefit of about $40 in 2020, while households in the highest income quintile would see a net cost of $245. Added costs for households in the second lowest quintile would be about $40 that year; in the middle quintile, about $235; and in the fourth quintile, about $340. Overall net costs would average 0.2 percent of households after-tax income.